In my previous postings here, I have suggested that by mid-year, Greece will be back in the market’s crosshairs. Now, time to look beyond that which consumes the media space once again.
The latest data on first-quarter GDP growth shows that the euro area economy has now trifurcated into a slow-growth core (Germany and Finland, plus Estonia and Slovakia), a Titanic-like periphery (Italy, Spain, Greece, Cyprus, Portugal and the Netherlands) and a no-growth pool containing all the other member states. The only uncertainties remaining at this stage are the smaller countries yet to report their figures for the quarter: Ireland (in an official recession since the fourth quarter of 2011); Luxembourg (which was still expanding at the end of 2011), Malta (which registered quarter-over-quarter contraction in the last three months of 2011); and Slovenia (which had a third consecutive quarterly contraction in GDP).
However, despite the market’s enthusiasm over the news of Germany’s better than forecast economic expansion and France’s avoidance, if only technically, of recession, the reality is that the euro zone has no growth engine. And it is not about to discover one either.
Take the Big Four economies. Combined, Germany, France, Italy and Spain account for 77 per cent of total euro area GDP.
In the past four quarters, Germany posted average quarter-over-quarter growth of 0.3 per cent, yielding an annualized rate of expansion of 1.2 per cent. This is what European Union leaders and the markets cheer as “sizzling” growth.
In comparison, France posted average quarterly growth of just 0.1 per cent in the year to April 1, 2012, with an annualized rate of expansion of 0.4 per cent. Having recorded zero quarterly growth in the first quarter, France is officially neither in a recession nor in an expansion.
Spain and Italy are the sick men of the Big Four. Spain has posted average quarter-on-quarter expansion of minus 0.1 per cent since the second quarter of 2011 and is now officially in a recession. Italy is in its third consecutive quarter of negative growth, with an average quarterly rate of minus 0.35 per cent over the year to April 1.
Exports, promoted by Brussels and the member states’ governments as the engine that will power Europe’s return to glory, are failing to deliver in:
•Belgium (an exporting powerhouse, with 0.12 per cent average quarter-on-quarter growth since April 1, 2011);
•Austria (another economy with a major contribution of exports to GDP and quarterly growth of 0.18 per cent on average since a year ago); and
•The Netherlands (major exporting nation, with average quarterly change in GDP of -0.3 per cent and three quarters of negative growth in a row).
Industrial production through March remains below 2005 levels in the euro area as a whole, primarily due to the construction sector collapse. But even excluding construction activity, industrial production was just 5.8 per cent ahead at the end of the latest quarter, compared to 2005, implying average annual growth of 0.8 per cent over the past seven years.
This is hardly surprising. The euro area is, in itself, a large economy with a current account surplus of only 0.3 per cent of GDP in 2011. One cannot expect such an economy to lift itself out of a structural recession via exports alone. And yet, for all the talk about structural reforms and competitiveness, the euro remains overvalued as a currency; the money supply remains stagnant once we control for the massive liquidity trap that is the European banking sector; credit supply is tightening, rather than easing; investment as a percentage of GDP is expected to shrink in 2012 and 2013; government expenditures remain above 49 per cent of GDP in 2012 as they were last year; and general government debt is still rising. It is expected to reach 90 per cent of GDP this year.
Structurally, since 1992, the euro area has recorded real GDP growth in excess of 2.5 per cent in only seven years, with four of those coinciding with the peak of two bubbles – in the dot-coms and banking. In other words, organically, absent superficial inflation of asset prices, Europe’s growth capacity is around 1.5 to 1.6 per cent per annum. Corresponding to this, the unemployment rate should be around 9.6 per cent, the government deficit over 3.1 per cent and a debt to GDP ratio of 68 to 70 per cent.
The truth is, Europe cannot reform its way out of the traditional growth-retarding pattern of policies that are based on debt-financed public investment and subsidies. No amount of politicians’ talk about a “growth pact” or further stimulus will do the trick.
And that, given the shifting focus in Europe’s electoral politics toward growth, is much more important than the fact France is not yet in a recession, or that German GDP grew 0.5 per cent quarter-on-quarter instead of a projected 0.3 per cent.
Constantin Gurdgiev is head of research with fund management firm St. Columbanus IA and lecturer in finance at Trinity College, Dublin.
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